Florida Real Estate Broker ExaminationValuation and Market AnalysisEasy
A real estate investor is evaluating a potential purchase of an apartment building. The building has a Net Operating Income (NOI) of $120,000 per year and a market capitalization rate of 8%. Using the income capitalization approach, what is the estimated value of the property?
- A$960,000
- B$1,200,000
- C$1,000,000
- D$1,500,000
Show answer & explanationAnswer & explanation
Correct answer: D. $1,500,000
The formula for the income capitalization approach is Value = Net Operating Income / Capitalization Rate. So, $120,000 / 0.08 = $1,500,000.
Why the other options are wrong
- A. This results from multiplying NOI by cap rate ($120,000 * 0.08), which is incorrect.
- B. This is an incorrect calculation.
- C. This is an incorrect calculation.
Income Capitalization Formula
The income capitalization approach estimates the value of income-producing property by converting its expected net operating income into a present value through capitalization.
- Formula: Value = Net Operating Income (NOI) / Capitalization Rate (Cap Rate).
- Cap rate represents the rate of return an investor expects.
- Used primarily for commercial and investment properties.
Memory trick: NOI over Rate gives Value (IRV).